Friday, March 24, 2006

Professor Stiglitz in China

Joseph Stiglitz has a formidable reputation. Fu Jing of China Daily (21 March) interviews him on his take on the ‘intense debate’ in China ‘on whether calls for the government to launch social programmes would hamper the market economy’. From the extracts and summaries it is difficult to spot what are Professor Stiglitz’s words and which are Fu Jing’s.

The heading places in quotes ‘has a key role’, which plays well with Chinese government officials.

"There is not one form of the market economy but many (Fu Jing?). "And governments can play an important role together with Adam Smith's invisible hand," Stiglitz said.”

Clear enough. But he repeats the usual nonsense about the invisible hand, which presumably will spread round China with the authority of Professor Stiglitz. The next sentence could be Fu Jung’s or Professor Stiglitz’s:

Smith, the 18th century Scottish economist and philosopher, is credited with laying the intellectual framework for the free market; and is famous for the expression "the invisible hand," which he used to demonstrate how self-interest guides the most efficient use of resources in a nation's economy, with public welfare coming as a by-product. "

Smith did not ‘use’ the ‘expression of the “invisible hand” to demonstrate to “how self-interest guides the most efficient use of resources in a nation's economy”. It was not about the allocation issue between resources in the national economy. It was about the unintended effects of human motivation (concern for the security of traders’ scarce capital) benefiting the national as opposed to foreign investments. In referred to ‘this case, and many others’ but left open whether self-interest was always beneficial in this manner.

From Smith’s writings on monopoly and conspiracies against consumers, he clearly saw limited benefits from unimpeded self-interest within a national economy. As a general proposition self-interest may be beneficial or may not be beneficial; which was decided on a case-by-case basis. Leaving it to ‘merchants and manufacturers’ was not a good policy.

Stiglitz defined the government's role as providing public services such as education, health, pension and other social safety nets and enabling the market to function well.”

Yes, pure Smithian analysis. But, Stiglitz allegedly goes on to say:

He said he was glad to note that the Chinese Government has recognized the need for a transition in its role from setting growth targets in the past to building what he called an "institutional infrastructure" for a working market economy. China's 11th Five-Year Plan (2006-10) can be a major step in this transition, he said.”

I am sure Professor Stiglitz did not enthusiastically endorse Communist China’s penchant for 5-year plans but was trying to nudge the planners away from central targets towards market infrastructure. Once China attends to its infrastructure a massive change in its overseas activity would follow and worries about is trade surplus will abate.

People more knowledgeable of Professor Stiglitz's views are better placed than I am to assess the credibility of the report.


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